The Political Economy of Bank Regulation in Developing Countries Risk and Reputation (by Oxford University Press)
The book have mainly provided a wealth of empirical evidence on the political economy dynamics that lead regulators in peripheral developing countries to converge on, and diverge from, international standards. Our case studies provide compelling evidence of the powerful reputational, competitive, and functional incentives generated by financial globalization that lead regulators to adopt international standards, even when they are ill suited to their local context. A striking finding from our case studies is that politicians and regulators were the main drivers of convergence. In the countries where implementation was most ambitious, politicians played a vital role, championing the expansion of financial services and integration into global finance as an important component of their country’s development strategy. In some cases, regulators advocated convergence on prudential grounds, concerned about the increasing risks posed by internationally active banks. But we also found evidence of strong reputational incentives to implement the latest international standards, which are considered the ‘gold standard’ in international policy circles. We explain how our findings speak to wider debates in the literature, including over the agency of actors from peripheral developing countries in the global economy; relationships between firms, politicians, and the state in developing countries; the importance of policy ideas, particularly the role of the financial sector in economic development; and the inner workings of bureaucracies in developing countries. We highlight areas for future research, including fine-grained analysis of political dynamics within government institutions in developing countries, and the trade-offs associated with independent regulatory institutions.
The book have mainly provided a wealth of empirical evidence on the political economy dynamics that lead regulators in peripheral developing countries to converge on, and diverge from, international standards.
Our case studies provide compelling evidence of the powerful reputational, competitive, and functional incentives generated by financial globalization that lead regulators to adopt international standards, even when they are ill suited to their local context. A striking finding from our case studies is that politicians and regulators were the main drivers of convergence. In the countries where implementation was most ambitious, politicians played a vital role, championing the expansion of financial services and integration into global finance as an important component of their country’s development strategy. In some cases, regulators advocated convergence on prudential grounds, concerned about the increasing risks posed by internationally active banks. But we also found evidence of strong reputational incentives to implement the latest international standards, which are considered the ‘gold standard’ in international policy circles.
We explain how our findings speak to wider debates in the literature, including over the agency of actors from peripheral developing countries in the global economy; relationships between firms, politicians, and the state in developing countries; the importance of policy ideas, particularly the role of the financial sector in economic development; and the inner workings of bureaucracies in developing countries. We highlight areas for future research, including fine-grained analysis of political dynamics within government institutions in developing countries, and the trade-offs associated with independent regulatory institutions.
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Tanzania 211
implementation.11 , 12 The consequences of these two factors in combination
was that the preferences of the regulator supported a faster implementation of
Basel II and III.
Preferences of the large commercial banks also changed in the second period.
A significant reason for this was the greater pressure to conform to international
banking standards emanating from the ‘parent’ banks of foreign commercial
banks in Tanzania. The large banks were all concerned to improve AML compliance
in Tanzania and saw Basel adoption as an important component in achieving
this. In addition, a number of the larger banks were concerned about the rapid
growth in the number of small commercial banks operating in Tanzania.13 While
the average capital reserves in the banking sector were consistently higher than
Basel standards, many of the smaller banks, and in particularly the Community
Banks, were operating with much lower levels of capital. Moving to introduce
the higher capital requirements contained in Basel II and III was therefore seen
as a desirable way to drive consolidation within the banking sector in Tanzania
(The Citizen, 2016b).
The larger commercial banks lobbied for faster Basel adoption through the
Tanzania Bank Association (TBA). They established a sub-committee of the TBA
called the Joint Committee on Regulation, Compliance and Risk. This was made
up of the five largest banks. The purpose of the sub-group was to participate in the
planning process for Basel adoption and they engaged in a regular dialogue with
the BoT on specific aspects of Basel adoption.14 These large banks also influenced
the BoT’s approach by running training programmes and sharing technical expertise
on issues such as correspondent banking and AML compliance.15 However, the large
influential banks were also in agreement that aspects of Basel II, such as internal
ratings models, were not appropriate for the Tanzanian banking sector and they
did not lobby for these to be included in the roadmap for Basel adoption.16 Thus,
the combined interests of the larger banks and the institutionalized channels of
influence played an important role in moving Tanzania towards a more rapid but
selective implementation of Basel II and III.
While the changing preferences of the regulators and the commercial banks
help to explain Tanzania’s more rapid, but selective, move to adopt and implement
Basel II and III after 2009, preferences of politicians also changed in ways
that encouraged a more tailored approach to Basel implementation and banking
regulation to emerge. Tanzania started to return to a more statist approach
11 Interview, Bank of Tanzania, July 2017.
12 The Bank of Tanzania issued a moratorium of three and five years for commercial banks and
community banks to fully comply with the minimum capital requirements following lapsing deadlines
in Kenya and Uganda.
13 Interviews, commercial banks, Dar es Salaam, April, July 2017.
14 Interviews, Tanzania Bankers Association, commercial banks, July 2017.
15 Interviews, commercial banks, April and July 2017.
16 Interviews, commercial banks, IMF, Dar es Salaam, April and July 2017.
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